March 19, 2018

Is $1 Million Enough to Retire?

A cool $1 million has long been considered the gold standard of retirement savings. These days, it's only a fraction of what you will really need.

For instance, a 67-year-old baby boomer retiring now with $1 million in the bank will generate $40,000 a year to live on adjusted for inflation and assuming a sustainable withdrawal rate of 4 percent, said Mark Avallone, president of Potomac Wealth Advisors and author of "Countdown to Financial Freedom."

It's worse for a 42-year-old Gen Xer, whose $1 million at retirement will only generate an inflation-adjusted $19,000 a year when all is said and done. And a 32-year-old millennial planning to retire at 67 with $1 million would live below the poverty line.

First of all, why are they assuming the millionaire today can't live in $40k? That's completely reasonable, especially if they live in a low cost-of-living city https://esimoney.com/where-you-live-has-a-big-impact-on-your-net-worth/ and/or have their house paid off https://esimoney.com/how-to-buy-a-house-and-pay-off-the-mortgage-in-less-than-10-years/.

Second, let's say the 42-year-old retired NOW with $1 million. He could take $40k out of that PLUS it's highly likely he will earn more money here and there. Very few young retirees never earn another penny in their lives once they retire. And if they have something like a small side hustle, that makes retirement MUCH more affordable.

On the opposite end of the spectrum is a post that says you can retire on $1 million or less -- and gives examples of just that, listing how to reach financial independence by age 35.

So which is it? Is $1 million enough to retire on or not?

The truth is, it depends on:

How much you plan to spend in retirement -- If you need to spend $30k, it probably is enough. If you need to spend $100k, it probably isn't.

How much you can earn off that $1 million -- If you can earn 10% income off it by investing in real estate, then you are probably ok. If you have to withdraw at 4%, maybe it's ok and maybe not.

What margins of safety you have -- Personally, I wouldn't leave work life without it. ;)

Comments

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How much you need is a factor of your expenses and risk tolerance. That being said I think rereading the article they are not arguing about a forty two year old today retiring on a million. They seemed to be focused on saving a million by sixty seven. In that case they are probably right. If you had only 1 million 25 years from now it’s probably worth about 250k today. It’s unlikely anyone can retire on that without alternate income sources. If you have a million at forty two it’ will most likely be worth more in twenty years.

Yes I think it's possible to retire with 1M (or less) in net worth. If not then the vast majority of today's American retirees are doing the impossible!

It's a bit tricky to answer whether you would "want" to retire with a 1M net worth. As you suggest factors include expected spending level, expected passive earnings, the buffer needed to cover the "expected unexpected", and the amount of flexibility you have on your spending level. All of these moving parts intertwine. For example because a 4% safe withdrawal rate typically assumes a 60% equity allocation there's a sequence of returns risk whose impact depends on your spending (and earning) flexibility. You can dial this "market risk" out by going all fixed-income, but then you'd take on the risk of high long-term inflation. And so on...

The effect of age at retirement I agree is important, but I'd choose a different comparison based solely on "today". I think it's reasonable for the average 67 yr old with average expected longevity and average spending level (and an average social security benefit) to retire today if he or she has 1M net investments (with 40% in equity, not 100% in the bank). But the same individual with the same net worth at age 42 today I think should continue working for a few more years to cover the wider range of possibilities that may occur during an extra 25 years of time horizon.

I think that a million dollars retirement is feasible today and likely will be in twenty-five years. I calculate growth based on 6.5 annual rate of return (half a basis point more than the average high yield bond fund). 1 mil will provide 65k per year. I can live comfortably on that if I no longer owe on my home or long-term savings.

Further, I think that it is out of touch with regular folks to say that a person cannot retire on 65k/year. That is 1.5 times the poverty line. Granted, there are additional health and well being risks at older age but for the average person, 65k/year would be a blessing. I understand that many of these articles are writing for people who live in major metropolitan; however, those are outliers that should be, as you say, a situation where "it depends".

I think $1m can be plenty or not enough, depending on your lifestyle. $1M with 3 young kids is different than $1M for a DINK couple who are geographically flexible. A lot of people with no kids start their $1M retirement in Southeast Asia where costs are low and quality of life is reasonably good. IF you don't mind doing that for a couple of years, you'll probably spend well under 40K for the first few years, allowing your portfolio to grow. A lot of people are amazed that they can get good quality health care in Thailand for a fraction of what it would cost in the US even though they're paying totally out of pocket with no insurance.

Well that's inflation for you. Especially in the big cities where real estate prices have soared, being a millionaire means nothing anymore. I still remember the days when the word "millionaire" was a coveted status.

Also without any margin of safety, I will not leave my workplace and postpone something extra, but since this million in the equivalent of 40,000 a year is not enough, depends on who earns what, but if you are able to retire in a fast dumb, it means that income is not low and later may be missing. Everything in my opinion depends on the mentality and the ability of a particular person.